Financial Investment Critical Analysis

Gregory Mangos

Agenda

• Background• Forecast:

• Net income• Operational Cash flows• ROE, WACC, ROIC• Dividends

• Intrinsic Stock Valuation• Analysis – Conclusion

•Breaking News• Conclusion

Background

• Three categorical business axis:• Consumer products (20%)• Pharmaceuticals (45%)• Medical equipment & Diagnostic (35%)

• Its brands cover:• Women’s health baby care, skin care, oral care, wound

care, nutritionals, pharmaceutical products, and prevention platforms

• Stats:• Founded in 1886 ()• 128,100 employees• 275 active subsidiaries • 60 countries

James Wood Johnson

Forecast

Forecast Present Value & Cash Flow Forecast

Fiscal year 2016 2017 2018 2019 2020 2021

Revenue growth rate, %

 -5.73

 2.00

 2.30

 2.57

 2.81

 3.03

Revenue, $m 70,0 74 71,475 73,119 74,999 77,108 79,446

Net income, $m 15,409 13,365 12,959 13,303 13,694 14,131

Operating Income, $m

Rev – Oper. Exp.19,196 19,504 19,963 20,496   21,102   21,779

•Successful financial history, does not mean a successful and prosperous future

•It is much more adequate to follow a valuation approach basing more on the future rather than the past

•The negative growth rate of -5.73% in 2016 compared to 2015 is not that encouraging but……

•Although there is negative growth in 2016, this currency changes to positive and steady growth rates

•Operating income (Dividend Payment) shows a steady increase but a minor year to year insignificant marginal increase

Financial Facts

• ROE: • 21.70% indicates the firm’s efficiency to generate more investor income and thus increased shared value• Is 85% higher than the 739 firms in the drug manufacturing industry

• WACC: • The interest rate to be paid for every dollar the firm finances (Pays to stakeholders).

• ROIC: • 26.88% produces higher returns on investment than the cost of the firm to gear and raise its investment. This

indicates again that JNJ is earning surpluses and it is important to maintain this excessive power along with growth.

WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)= 0.9418 * 8.35% + 0.0582 * 2.8585% * (1 - 20.175%)= 8%

Dividends

•JNJ’s stock value has historically been increasingConstantly

•Dividend Yield = Cash Dividends per share/ Market Share per value

•D.Y for 2016 = 635/215 = 2.95

Intrinsic Stock valuation

Intrinsic Stock valuation

Year Value Terminal value Present value at

9.98%

0 DPS1 2.95  

1 DPS2 3.20= 2.95 × (1 + 8.57%) 2.91

2 DPS3 3.47= 3.20 × (1 + 8.23%) 2.87

3 DPS4 3.74= 3.47 × (1 + 7.88%) 2.81

4 DPS5 4.02= 3.74 × (1 + 7.54%) 2.75

5 DPS5 4.31= 3.74 × (1 + 7.54%) 2.68

5 Terminal Value 165.65 = 4.31 × (1 + 7.20%) ÷ (9.98% – 7.20%) 103.12

Intrinsic value of Johnson & Johnson's common stock (per share) $117.14

Current share price $113.56

Dividend Analysis - Conclusion

• Minimum: $60,20• Maximum: $113.56• Average: 86.10• Opportunity: Insufficient buy

………………………………………………• Dividend growth will shrink

• Saturation • Reached a peak (Decline)

• Next 5 years the investment: Avoided• Opportunity at the $100-105 zone

Breaking News: Talcum Tied to Woman's Cancer

Negative publicity JNJ’s Baby Talcum Powder$79 Mill. to pay in suit

Conclusion

• 2016: JNJ’s earnings grew at a steady rate of 6.2% • 2017: Rise in the growth rate value is rated at 9.98%• We consider that the EPS at $5.49 along with a 6.20% growth rate and a discount

rate at 10% results in a fair value of approximately $100-105. Because

Wishes to All for a Great Summer!!